Escapes within quoted atoms

I've been reading chapter 2.1.2 in the Erlang book which talks about
Atoms, and I have a question:
\^A .. \^Z The given meaning is "control A to control Z (i.e. 0..26)"
At first I thought this should read 0..25, but then maybe it's the Swedish
alphabet 0..28.
I checked the Swedish alphabet theory with the atom '\^Ä' (Ä is Latin
capital A with diaeresis) in Eshell V5.4.9 and got an unexpected response:
5> '\^\304' .
'\004'
It is implicit in chapter 2.1.2 that \x => x if x has no other meaning, so
why don't I see '\^Ä' => '^Ä'.
Roger